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Dollar stores merge in $8.5B bargain

By Candice Choi and Michelle ChapmanAssociated Press

Posted:
07/28/2014 12:01:00 AM CDT

Updated:
07/28/2014 08:39:10 PM CDT

The fight for penny pinchers is intensifying.

Dollar Tree said Monday it is buying rival discounter Family Dollar for $8.5 billion, significantly broadening its reach as it looks to fend off Walmart, which has been stepping up its courtship of lower-income customers.

The deal makes Dollar Tree the biggest player in the dollar store segment, with its more than 13,000 combined locations and a powerful presence in the Twin Cities. If the deal goes through, the merged Dollar Tree company will have 90 stores in the Twin Cities area.

Dollar Tree has about twice as many Twin Cities-area stores as Family Dollar, but both retailers have multiple stores in the city of St. Paul.

The current leading dollar-store discounter, Dollar General Corp., has more than 11,300 stores in the U.S. but no stores in St. Paul; its website lists only two locations in the Twin Cities, in Hilltop and Mounds View.

Business for dollar stores grew during the recession as people across income groups searched for cheaper options. To attract a broader array of customers, they also expanded their offerings to include more groceries and brand-name products, instead of just the party favors and other knickknacks people often associated with them.

On Monday, Dollar Tree CEO Bob Sasser noted that his company and Family Dollar have different business models. While all items sold at Dollar Tree cost just a dollar, Family Dollar charges a broader range of prices, which allows it to sell a greater variety of items including brand-name products such as Kraft cheese or Tide laundry soap.

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He said the two chains "co-locate really well" and offer complementary merchandise.

Brian Sozzi, CEO and chief equities strategist at Belus Capital Advisors, said because the Dollar Tree deal will allow the company to lower expenses by merging its operations, it will ultimately be able to lower prices to better compete with Walmart.

"Now they're going to take the fight back to Walmart," Sozzi said.

The deal also gives Dollar Tree more flexibility.

Still, Family Dollar, which has more than 8,000 locations, has been shuttering stores and cutting prices in hopes of boosting its financial performance. Last month, investor Carl Icahn urged the company to put itself up for sale. Icahn has built up a stake in the company of more than 9 percent, according to regulatory filings. Based on his purchase price at the time, he stands to make nearly $200 million from the deal.

In a statement, Icahn said he was "extremely pleased" with Dollar Tree's plans, but that he still thinks there are "a handful of potential buyers who could realize greater synergies" with Family Dollar.

The companies did not say if any Dollar Tree or Family Dollar stores would be closed. Dollar Tree, which has about 5,000 locations, will continue to operate under the existing Dollar Tree, Deals, and Dollar Tree Canada store banners. It will keep the Family Dollar brand as well, with Chairman and CEO Howard Levine reporting to Sasser.

Including debt and other costs, the companies estimate the deal to be worth more than $9 billion.

Family Dollar stockholders will own somewhere between 12.7 percent and 15.1 percent of Dollar Tree's outstanding common shares at closing. Dollar Tree plans to finance the deal with available cash, bank debt and bonds.

The boards of both companies unanimously approved the deal, which is expected to close by early next year. It still needs approval from Family Dollar shareholders.

Family Dollar shares rose 24.9 percent to close at $75.74 Monday after earlier reaching a record high of $76.82. Shares of Dollar Tree rose 1.2 percent to $54.87.

The combined Dollar Tree-Family Dollar chain will have sales of more than $18 billion. Family Dollar Chairman and CEO Howard Levine will still lead those stores and report to Sasser.

Dollar Tree plans to finance the deal with available cash, bank debt and bonds. Family Dollar Stores is based in Charlotte, N.C.; Dollar Tree in Chesapeake, Va.